Bankruptcy Alphabet: D is for Do’s and Don’ts

Moving down the alphabet list, we’ll discuss the Do’s and Don’ts of Chapter 7 and Chapter 13 bankruptcy in this post.

DO’S and DON’TS of Bankruptcy

THE DO’s

DO take bankruptcy seriously. It is a privilege and courts take a very dim view of abuse of that right.

DO be honest. It is against the law to lie in bankruptcy proceedings. You are sacrificing a small portion of your privacy to get a discharge of your debts. If you lie on your petition, or if you conceal assets, you could get in very serious trouble.

DO be forthcoming with your attorney. Even if it is embarrassing, even if it makes you look like an idiot or a crook, it is better if your attorney knows. Giving your attorney insufficient information is like hiring a chauffeur and not telling him or her that your brakes don’t work.

DO give your attorney EVERYTHING in your relevant financial files, again even if it is embarrassing or incriminating. If you have the document, the odds are someone else does too.

DO inform your bankruptcy attorney EVERYONE you owe money to. This includes family and friends.

DO continue making payments on vehicles which you intend to keep. Creditors secured by a car or truck can usually repossess the vehicle without notice to you anytime you are in default in your payments.

DO adjust the amount withheld from your pay for taxes to get to as close as possible to getting no refund or owing. You want to be as close to zero as possible. A tax refund is an asset in Chapter 7, and your tax withholding can affect plan payments in a Chapter 13.

DO close or keep minimal the amount in your checking and saving accounts at any banks where you also have a credit card or line of credit. If you stop paying on your credit card or line of credit, the bank may actually go into your checking and savings account and pay your credit card/line of credit.

THE DON’TS

DON’Trepay loans to friends, relatives, family or business associates who have lent you money. Payment to an “insider” (which includes relatives, friends and business associates) within one year before you file bankruptcy is a “preference.” The trustee may recover preferences from the person that was paid and divide the money between all of your creditors. You can pay back anyone you like after the bankruptcy. If you have already repaid such a person, we’ll discuss how to handle the situation.

DON’T talk to your creditors or bankruptcy trustee directly after you have filed for bankruptcy. Tell them to talk directly to your bankruptcy lawyer. If you receive mail from them, forward it to your attorney immediately.

DON’T keep a creditor off your petition for any reason. If you intend to pay them back, you can after the bankruptcy, but you must list them.

DON’T run up a lot of bills immediately before you file. If you max out your credit cards or take out a loan before you file, the court could find your petition was filed in bad faith and dismiss it, or except those debts from discharge.

DON’Tborrow or withdraw money from your 401k, IRA, and ERISA qualified savings and retirement plans to pay bills. Early withdrawal of these funds makes you liable for penalties and taxes which may not be discharged in bankruptcy, and you may be able to exempt and keep all funds maintained in these accounts.

DON’T borrow money on your home to pay unsecured (i.e. credit card, utility or medical) bills. If you take out a second mortgage on your home, you may be converting debt which would have been discharged in bankruptcy into debt which you will still have to pay in order to keep your home. These additional payments could be high enough to cause you to lose your home.

DON’T put property you own into someone else’s name to avoid it being taken by creditors or the trustee. That kind of transfer is a fraud on creditors and can result in your discharge being denied. In addition, the trustee can take the property from the person to whom it was transferred.

DON’T attempt to sell your property for less than what it’s worth. This will not reduce the amount you eventually have to repay — and you or whoever you sold it to may end up stuck with the difference.